- China out for the whole week in observance of the spring festival
- Notable absence of US macro pointers
- RBA and BOE both almost certain to hold their policies unchanged
- EU and US company earnings coming in thick and fast
- Potential for ‘overbought’ stocks to sell-off and trigger “risk-off” in wider markets
- Commodity dollars in focus but overall only handful of market-moving data
Recap: Fed in U-Turn, Jobs beat and strong tech earnings
If we were to summarise this week, then it has all been about the Federal Reserve, nonfarm payrolls data and major US tech earnings results.
The Fed successfully triggered a stock market rally in mid-week that helped to propel the major US stock indices to new highs for the year, while the Dollar Index was pushed back towards its early January lows where it rebounded on Thursday ahead of today’s jobs report. We had already anticipated that the Fed and its chairman Jay Powell would deliver a dovish surprise and as it turned out, that was indeed the case. This should not have come as surprise, but the markets’ reaction suggests that the Fed was perhaps more dovish than had been anticipated. All of a sudden, the central bank’s focus has shifted from a bias towards hiking rates to a completely neutral and data-dependent outlook. The FOMC will now be “patient” in determining future “adjustments” to interest rates given “muted inflation pressures.” Reading in between the lines, the Fed may even lower interest rates should the economy deteriorate, as “adjustments” could mean a rate increase but also a cut. Mr Powell also confirmed reports that the Fed is evaluating its balance sheet strategy and will be finalising plans at the coming meetings.
As a strong jobs market was largely pre-empted by the Fed’s big shift from hawkish to neutral on Wednesday, the blowout headline NFP number – which showed job creation nearly doubling up expectations at 304k vs. 165k eyed in January – caused little initial reaction in the markets as my colleague Matt Weller noted earlier. We also had a rather strong manufacturing PMI later on in the afternoon. Traders wondered what that might mean for interest rates given that the Fed is “data-dependant” again, so the dollar rebounded slightly and stocks started to ease off their best levels.
In terms of major earnings news, while the likes of Apple, Facebook and Amazon all beat expectations, disappointing guidance from Apple and more significantly Amazon took some shine off the numbers. AMZN slumped on Friday and this weighed down on the Nasdaq. If lower guidance becomes a trend, then it would become difficult for investors to justify holding stocks at these elevated levels and so we could see another potential correction in the coming weeks. The focus now turns towards European companies as we have now had most of the big US company results already.
Look ahead: China out, RBA and BoE
Tuesday: As well as Aussie retail sales, we will have the Reserve Bank of Australia meeting first thing on Tuesday, while UK and US services PMIs will be released later on in the day.
The RBA rate decision is going to be a straight forward one, but it will still be interesting to see what the bank says about the future of monetary policy in Down Under. On the one hand you have a weakening Chinese economy but on the other there has been slight improvement in domestic data, although probably not enough for the RBA to drop its dovish bias:
- Inflationary pressures in Australia have strengthened slightly with the latest quarterly CPI climbing by 0.5% quarter-on-quarter in Q4 or 1.8% year-over-year
- Employment data has been coming in stronger in recent months and beat expectations once more last week. As a result, the unemployment rate has fallen to just 5.0%
- Retail sales ticked up 0.4% m/m, a touch higher than expected
- But building approvals slumped noticeably again by a good 9.1% m/m
- Concerns over China — Australia’s largest trading partner — is likely to be a major reason for the RBA to hold rates at the current record low rate of 1.5% for a 29th consecutive month and deliver a dovish outlook.
- A recent Reuters poll suggests economists think the RBA will hold rates through to the third quarter of 2021. Only 6 participants expected a hike to come in March 2020 compared with 11 previously.
Wednesday: New Zealand’s quarterly employment data due late in the day or Thursday morning NZ time.
- The trend for employment in NZ has been a positive one, with employment in the third quarter of last year rising by a solid 1.1%, easily beating forecasts
- In fact, NZ employment have grown in each of the past 5 quarters, and by better-than-expected results.
- Over the past 12 quarters, NZ employment has only fallen once. Over that period, we have seen a good 10 readings that were above forecasts; one which met expectations and the only miss was the unexpected drop.
Thursday: The Bank of England’s so-called “Super Thursday” is likely to be a damp squib for pound traders given the lack of progress in the Brexit process, with the exit date of March 29 fast approaching.
- So, no one is expecting any changes in interest rates or QE — and it should be a unanimous decision from the Monetary Policy Committee.
- It will be interesting to hear what the BoE’s assessment of the economy and inflation will be in the quarterly Inflation Report and Governor Mark Carney’s press conference given the (1) continued Brexit uncertainty, (2) further improvement in domestic wage growth, (3) slowdown in economic activity in China and Germany, and (4) cautious outlook from a couple of other major central banks recently including the Fed and ECB
Friday: Canadian monthly employment report takes centre stage
- Usually, the Canadian employment figures are overshadowed by the more closely-followed US non-farm payrolls report as they are both usually released simultaneously
- Given that we have just seen the US jobs data, the Canadian employment numbers are likely to garner more attention than usual.
- It is fair to say that in contrast to the US, Canadian employment figures have been far less impressive.
- While there have been more beats than misses over the past few years, in 2018 we have seen a very mixed overall picture.
- Out of the past 12 employment reports for the year 2018, only 6 have beaten expectations and of the 6 misses, four were unexpected drops in jobs.
- But the trend since the second half of 2018 has been more positive.
- There were notable increases in Canadian jobs in preparation for the Christmas period with employment in September rising by 63,300 and in November by a good 94,100. October and December saw only moderate increases.
Could overbought stocks come under renewed pressure?
So, with China out and economic news fairly on the light side, we are watching the stock markets closely for there’s a possibility we could see another motion to the downside given the short-term “overbought” conditions on many indices and as most of the major US companies have reported their numbers. A potential drop in stocks could trigger safe-haven flows into the Japanese yen, Swiss franc and gold.